Economic recovery on firm footing, output gap almost closed, says RBI

ET Bureau|

Jun 07, 2018, 10.52 AM IST

0Comments

MUMBAI: The country’s economic growth recovery is on a firm footing amid growing output in relation to the potential capacity, the Reserve Bank of India has said, possibly hinting at a hawkish stance in the days to come amid rising inflation concerns.

“Economic activity has exhibited sustained revival in recent quarters and the output gap has almost closed,” RBI’s monetary policy committee said in a statement on Wednesday. This means that the economy is growing to its full potential.

The RBI panel acknowledged that the reviving economy may get some boost from swift resolution of distressed assets under the Insolvency and Bankruptcy Code (IBC).

A buoyant global demand is also expected to help encourage exports and provide a further thrust to investment.

Consumption, both rural and urban, remains healthy and is expected to strengthen further, even though a sharp rise in petroleum product prices in recent times is likely to impact disposable incomes, the central bank said.

“Capacity utilisation in manufacturing has increased,”
RBI governor Urjit Patel said at the post policy media conference here on Wednesday.

With improving capacity utilisation and credit offtake, investment activity is expected to remain robust even as there has been some tightening of financing conditions in recent months. “Investment demand is set to accelerate,” said RBI deputy governor Viral Acharya.

However, according to RBI’s industrial outlook survey, activity in the manufacturing sector is expected to moderate marginally in the second quarter of 2018-19 on account of deterioration in the overall business situation and order book.

Even as RBI has acknowledged revival in investments, it said it’s important that public finances do not crowd out private sector investment activity at this crucial juncture.

In a situation when growth impulses are strong and inflation pressure rises, the central bank often adopts a hawkish stance or refrain from any rate cuts to boost investments.

RBI estimates project that the economy will grow by 7.4 per cent this fiscal as forecast in its April policy. GDP growth is projected at 7.5-7.6 per cent in the first half of the fiscal and at 7.3-7.4 per cent in the second half, with risks evenly balanced.